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Design, Build, Finance Agreements for the Construction of Transportation

January 12, 2010
Eugene A. Conti, Jr.
North Carolina Department of Transportation
1501 Mail Service Center
Raleigh, North Carolina 27699-1501
Re:      Advisory Opinion — Design, Build, Finance Agreements for the Construction of Transportation Infrastructure; NCGS §136-18(39)
Dear Secretary Conti:
You have requested our opinion as to legal issues which may be implicated by the North Carolina Department of Transportation’s (NCDOT) proposal for completion of the Charlotte Outer Loop (I-485) on an expedited basis.  You have provided us with a variety of information outlining the basic structure of the proposal, including relevant sections of a draft Request for Proposals.
Based on the information reviewed, we understand that the proposal contemplates three separate design/build agreements with contractors or contractor groups: (1) the construction of the I-485 interchange (R-2123CE); (2) the necessary widening of I-85 (I-3803B); and, (3) construction of the last five miles of the I-485 Loop (R-2248E). The total estimated cost of $540 million for the three projects is projected to be funded through a combination of Grant Anticipation Revenue Vehicles (GARVEE bonds) and State Highway Trust Fund revenues. The projects are required to be completed within approximately five years, however, on two of the projects payments to contractors will be extended over a ten-year period. We have been advised that structuring the contracts in this manner will accelerate completion of the Charlotte Outer Loop by five years and may save between $50 million and $100 million. 

It is our understanding that the "delayed-payment" component of two of the proposed agreements will be modeled from a "Design-Build-Finance" contract previously used by the State of Florida Department of Transportation.  As described, NCDOT has established an estimated contract price for each of the three projects in accordance with normal contracting procedures. Revenues projected to become available from the Highway Trust Fund and the sale of GARVEE bonds have been calculated over a ten-year period.  The I-85 widening project will require completion by 2015 and will be completely funded over the five-year period through a combination of Highway Trust Fund revenues and GARVEE bonds.  The other two contracts (I-485 Loop and I-485 Interchange) will require project completion by 2015, with periodic payments extending through 2020.  The I-485 Loop project will be structured to pay out 89% of the contract value during the actual performance period and 11% post-performance.  The I-485 Interchange project will be structured to pay out 87% of the contract value during the performance period and 13% post-performance.
The Request for Proposals for the I-485 Loop and Interchange projects will inform prospective contractors of the maximum amount of funds available on a periodic basis throughout the ten-year contract term.  Prospective contractors will be required to demonstrate their financial capability to meet the contract terms and conditions, including the delayed payment schedules, either through existing internal resources, joint-venture arrangements, or third-party financial support. NCDOT will neither provide financing nor guarantee debt.  Although some contractors may include the cost of borrowing money in their bids (as is the case in most traditional construction contracts awarded by NCDOT), there will not be a line item interest component in the Request for Proposals and NCDOT will not make any direct interest payments.
As we understand your inquiry, the specific question posed is whether NCDOT is vested with legal authority to execute a contract, as described in the draft Request for Proposals, which includes a delayed payment schedule under which contractors will receive payments for a period of time extending beyond completion and acceptance of the project.  The State Treasurer’s Office has questioned whether the proposal to extend contract payments over a period of time exceeding the actual period of performance constitutes "financing" by NCDOT.  They suggest that if NCDOT enters into a contract which involves "borrowing," debt may be incurred and thereby implicate the State’s "debt affordability ceiling" and AAA bond rating.  The Treasurer’s Office has therefore cautioned NCDOT about moving forward with the delayed-payment proposal and suggested that other options may be available for expedited completion of the I-485 project.
NCDOT’s general contracting authority and procedures for construction and repair of highways is codified as NCGS §136-28.1.  This provision requires standard public advertising and low bid award in accordance with regulations promulgated by NCDOT.  The General Assembly has also authorized NCDOT to award contracts through other procedures when necessary to comply with federal-aid requirements. See, e.g., NCGS §136-18(12).  Additional flexibility was provided in 2004 by Session Law 2004-168, which allowed NCDOT to enter into agreements with local governments and non-profit corporations to receive non-state funding in order to advance the construction schedules of highway projects in the Transportation Improvement Program.  This legislation specifically authorized NCDOT to, in effect, borrow money from local governments and non-profit corporations on the condition that all funds advanced be reimbursed within seven years.  NCGS §136-18(38).
In 2006, the General Assembly enacted Session Law 2006-30 (now codified as NCGS §136-18(39)), entitled "An Act to Authorize the Department of Transportation to Enter Into Certain Highway Financing Agreements, To Require Agreements Involving Department Funds to be Approved by the Board of Transportation, and to Provide that Replacement Inspection Stickers For Use on Replaced Windshields Are Not Subject to the Inspection Sticker Fee". This amendment further expanded NCDOT’s contracting authority by allowing the Department, with Board of Transportation approval, to enter into agreements with private entities, political subdivisions and the North Carolina Turnpike Authority to finance by tolls and other financing methods authorized by law, the cost of acquiring, constructing, equipping, maintaining, and operating highways, roads, streets and bridges.  Subsequent amendments to NCGS §136-18(39) clarified that NCDOT’s authority to enter into financing agreements included contracts for the construction of all transportation infrastructure, as well as properties adjoining rail lines, and added legislative reporting requirements. See Session Law 2007-439; Session Law 2008-164, s.1; Session Law 2009-266, s.6.
The present version of NCGS §136-18(39) vests NCDOT with the power:    

To enter into partnership agreements with the North Carolina Turnpike Authority, private entities, and authorized political subdivisions to finance, by tolls, contracts, and other financing methods authorized by law, the cost of acquiring, constructing, equipping, maintaining, and operating transportation infrastructure in this State, and to plan, design, develop, acquire, construct, equip, maintain, and operate transportation infrastructure in this State. An agreement entered into under this subdivision requires the concurrence of the Board of Transportation. The Department shall report to the Chairs of the Joint Legislative Transportation Oversight Committee, the Chairs of the House of Representatives Appropriations Subcommittee on Transportation, and the Chairs of the Senate Appropriations Committee on the Department of Transportation, at the same time it notifies the Board of Transportation of any proposed agreement under this subdivision. Any contracts for construction of highways, roads, streets, and bridges which are awarded pursuant to an agreement entered into under this section shall comply with the competitive bidding requirements of Article 2 of this Chapter.
NCGS §136-18(39).  Under this provision, NCDOT is authorized to enter into agreements with private entities to finance the cost of constructing transportation infrastructure through any financing method authorized by law. The primary objective of statutory interpretation is to ascertain and effectuate the intent of the legislature. Burgess v. Your House of Raleigh, 326 N.C. 205, 209 (1990).   Where the language is clear and unambiguous, courts "will apply the plain meaning of the words, with no need to resort to judicial construction."  Wiggs v. Edgecombe County, 361 N.C. 318, 322 (2007).  In our view, the plain language of NCGS §136-18(39) vests NCDOT with the authority to contract with private entities for the construction of the I-485 projects under contract terms which may involve financing.  As such, assuming the extended payment schedule described in the draft Request for Proposals constitutes "financing," we believe the General Assembly has authorized NCDOT to expedite construction in this manner.
Furthermore, we have been unable to identify any provision of North Carolina law that would prohibit the contracting proposal described by NCDOT.  Nor are we aware of any case law restricting delayed payments by a state entity to a contractor. 
We are aware, however, that interested contractors, bonding companies and financial institutions have suggested to NCDOT that the Request for Proposals can be modified in ways which they contend will result in additional cost savings.  Some of these recommendations involve authorization to assign payments and financing guarantees by NCDOT.  We understand that the first draft Request for Proposals will allow prospective contractors to submit these types of suggestions and that NCDOT will consider whether the second draft Request for Proposals should be modified.  Our opinion that NCDOT has legal authority to move forward as proposed with the expedited completion of I-485 is based solely on the draft Request for Proposals provided to us prior to the issuance of this opinion.  Should future drafts, or the final contract, include new substantive provisions, reconsideration of this opinion may be required.
We will of course, be pleased to continue to work with you and your staff as you move forward with this project.  Please contact us if you have further questions or concerns.
Very truly yours,
 Grayson G. Kelley
                     Chief Deputy Attorney General